WASHINGTON — An Internal Revenue Service memorandum that would render a community development district's bonds taxable should not be retroactive because a House committee last year urged guidance on political subdivisions be prospective, the CDD's lawyer said.
Perry Israel, a lawyer representing the Village Center CDD in Florida, sent Helen Hubbard, IRS associate chief counsel for financial institutions and products, a letter alerting her to the language in a House Appropriations Committee report, which accompanied the House Financial Services and General Government Appropriations bill for fiscal 2015. The bill was included in the omnibus appropriations legislation that was signed into law in December.
At issue is a technical advice memorandum issued by the IRS chief counsel's office in May 2013, during an ongoing audit of the bonds. The memorandum found that the Village Center CDD is not a political subdivision, and therefore cannot issue tax-exempt bonds, because its board is and always will be controlled by the developer rather than publicly-elected officials.
The CDD opposes the TAM's conclusion, but has requested that if it is upheld, it should be applied prospectively. However, the IRS tax-exempt bond office, which is conducting the audit, wants the TAM to be applied retroactively. The IRS chief counsel's office has not yet ruled on the CDD's request.
The CDD's bonds in question are no longer outstanding. They were defeased with taxable refunding bonds last year.
The House Appropriations Committee wrote in its report that it "is concerned that recent actions by the IRS have caused confusion concerning the definition of a political subdivision under the tax-exempt bond rules, including for entities long-recognized as political subdivisions, and have resulted in the inability to move forward with or the delay of economic development projects throughout the country."
The committee added that it "encourages the IRS to issue guidance to clarify the definition of political subdivision, to provide opportunity for public comments prior to any changes, and to make changes, if any, prospective."
Israel wrote that the House committee report is "directly germane" to the TAM and the request for prospective application. When the committee states that IRS actions have caused confusion, it is referencing the TAM, and when the committee mentions that there is confusion about the definition of political subdivisions for entities that have long been recognized as such, it is referring to community development districts, he said.
John Cross, associate tax legislative counsel at the Treasury Department, has mentioned the House committee's comments on political subdivision guidance at conferences, Israel noted.
Treasury and the IRS put guidance on the definition of a political subdivision on their priority guidance plan "in response to concerns raised about the TAM in the public finance community," Israel wrote. The fact that the agencies plan to do a guidance project on this topic indicates that the TAM should not be applied retroactively, he added.
"If the IRS were to determine that the new guidance should be prospective only, it would be a true injustice to single out the center district for retroactive treatment," Israel wrote.